What Is Inflation And How Will It Affect You?

Inflation has risen to 10.1%, hitting double digits for the first time since 1982.
Aleksandar Miljkovic via Getty Images

Inflation rose to 10.1% in July, according to official figures from the Office for National Statistics (ONS) – the first time the UK has seen double digits since 1982.

This latest figure also exceeds predictions of 9.8% and is a significant jump from June’s rate of 9.4%.

The Bank of England has warned that inflation could even exceed 13% later this year, and predicted a recession – expected to last over a year – will begin this autumn.

For context, the Bank of England has a mandate to keep inflation under 2%.

The UK now has the highest rate among all the G7 countries.

But what do these numbers actually mean for you and your bank balance?

Here’s what high inflation rates actually mean

Inflation is defined as the annual change in prices for a set of goods and services, a way of measuring how quickly prises are rising.

When inflation rates goes up, it means the average cost of living increases – which makes sense as the current average inflation rate is 10.1%, and the UK is in a cost of living crisis.

The current inflation rate means a coffee which was previously £1 becomes £1.10.

You might also have heard of the famous Goldilocks and the Three Bears analogy to help you understand why inflation is important.

If it’s too low, economic growth is too “cold” and won’t grow. If it’s too high, the economy’s too “hot” and growing too quickly.

The ideal inflation rate is “just right” – much like that third bowl of porridge – and is generally around 2%, give or take one percentage point.

This is how the current inflation rate compares to previous peaks over the last 40 years.

UK inflation rate
PA GraphicsPress Association Images
UK inflation rate

What has caused this?

After subsequent Covid lockdowns, the economy has struggled to regain its footing all over the world – but that’s not the only factor.

Surging energy bills are the largest contributor to inflation right now, because of the knock-on effect of the Ukraine war and how this has caused wholesale oil and gas prices to rise over a supply shortage. Many of the supply problems stem from the West’s sanctions against Russia.

As a result, the UK’s energy price cap was lifted. The average gas prices jumped by 53.5% and electricity prices by 95.5% in April.

They are expected to get even higher in the coming months, with the average annual energy price bill rising to £3,582 come October, potentially up to £4,000 come January.

Fuel prices have surged, with average petrol reaching 161.8p per litre in April this year (the highest on record) compared to 125.5p in April 2021.

The Bank of England governor, Andrew Bailey, previously warned of an “apocalyptic” rise in food prices – groceries are said to be driving the current inflation rate – and has predicted that a recession is just around the corner.

The costs of other items, such as raw materials, household goods, furniture, restaurants and hotels are going up too, as is the rate of VAT for some firms.

Rates for air passenger duty and vehicle excise duty (commonly known as road tax) have been raised along with the cost of postage, water bills in England and Wales and interest rates for mortgage payments.

So are we heading for a recession?

A recession is when the economy shrinks for two consecutive quarters, signalling that people are, on the whole, spending much less.

In early August, the Bank of England forecast a recession lasting for more than a year and inflation climbing to 13.3% on the day that it has confirmed it is increasing interest rates to 1.75%.

Increasing borrowing costs does mean the UK is more likely to fall into a recession.

But, the governor of the Bank of England, Andrew Bailey, promised in July that it still planned to stick to its 2% inflation target – and interest rates is the best way to that.

As we move away from the inevitable economic dip, inflation is expected to gradually head back towards the 2% level set out by the Bank of England. But, that could be years away.

Will the government help?

The Treasury has already pledged to spend around £15bn to support the public, partially funded by a £5bn windfall tax on energy companies.

It released first payment for cost of living support in July, meaning more than eight million households in the UK would receive £650 in two lump sums.

This is meant for households which are already on means-tested benefits.

There’s also an extra £400 for all energy bill payers which will not have to be paid, while more than eight million pensioner households will receive an extra £300 towards winter fuel payment. An additional six million disabled people will get a one-off payment of £150 as well.

However, many experts – including MoneySavingExpert Martin Lewis – believe this is not enough, and that action needs to be taken now, while Labour have outlined a plan to freeze the energy price cap, subsiding costs for consumers.